The Reserve Currency and Globalization

The Movement for a People’s Party recently published their platform, which includes the key issues in the 2016 campaign. This makes it possible to discuss each point on this platform in the context of the particulars of American policy making. In this post I want to talk about the entry, ‘Reigning in Wall Street and Promoting Public Banking’:

The massive too-big-to-fail banks are much larger and more consolidated than when we bailed them out after they caused the Great Recession. They are threatening to crash the global economy and wipe out millions of jobs again. Revive Glass-Steagall and break up the big banks. End too-big-to-jail and hold accountable financial executives who defraud the public. Pass a financial transactions tax and regulate the sale of derivatives. Reduce and cap credit card interest rates. Reign in corporate power by breaking up monopolies, enforcing antitrust laws and reversing the consolidation of businesses.

Ban corporate stock buybacks used to manipulate the stock market and taxable income, reduce investment in R&D and inflated CEO compensation. Eliminate conflicts of interest and increase transparency at the Federal Reserve. Enforce stricter oversight of banks, revoking the banking licenses for those that repeatedly engage in criminal, fraudulent, discriminatory and negligent activity at the public’s expense. Immediately revoke the licenses of banks found to be financing terrorism and drug cartels that presently get off with minor fines. Prohibit banks from writing off fines from criminal activity as tax deductions.

Expand public banking and postal banking. Public banks like the Bank of North Dakota are driven by service to their community rather than the profits of distant, giant multinational corporations. They make affordable loans to small businesses, farmers, students and government agencies. They save taxpayers’ money on infrastructure projects, eliminate billions in banking fees and keep profits in the local community – funds that can be returned to the people in the form of better schools, more libraries and lower taxes. Charter state banks in each state as well as a national postal bank, similar to the one that many developed nations have.

I appreciate the fact that this entry mentions both banking reform and monetary policy but I regret that I have something very discouraging to say on this topic. It’s hard to avoid the conclusion that the people of the United States were sold out at Bretton Woods. I will argue that the problems we face today were made possible, even inevitable, by FDR during the World War II era Bretton Woods conference, and that unless we end globalization there’s no use trying to implement banking and monetary reform or any of the other proposals on this platform.

Some might argue that those responsible for the Bretton Woods system were not evil at all, they just failed to predict the results of their policies. That seems to be the position of an article reporting the chilling announcement by Robert Triffin in 1959. Triffin said that using the dollar as the world’s reserve currency would require the United States to run ever-growing deficits. I don’t doubt his sincerity—I doubt the claims of haplessness on the part of policy makers, especially since nothing has been done in the intervening decades to correct the problem. Today the United States runs the largest current account deficit in the world. And yet the people of the United States were recently blamed for taking on too much debt and causing the housing bubble. They were even blamed for failing to be in a higher tax bracket. These are not the actions and attitudes of contrite bureaucrats. They are the actions and attitudes of human wolves, jackals and hyenas.

Another clue that something is amiss is the way the story of Bretton Woods is told. The United States is said to have ‘agreed’ to have its currency used as a reserve currency. This doesn’t really work as an explanation because the United States was in charge at Bretton Woods—or rather people who claimed to represent the United States were in charge. In the end, Bretton Woods helped those people but it did not help the people. But this was inevitable. A reserve currency status makes it impossible for a country to help its own people.

A natural paradox is experienced by the country with the reserve currency. It wants the ‘interest free’ loan generated by selling currency to foreign governments and the ability to raise capital quickly because of high demand for reserve currency-denominated bonds; but it also wants the ability to use capital and monetary policy to ensure that domestic industries are competitive in the world market and to make sure the domestic economy is healthy and not running large trade deficits. (Guess which one the policy makers want the most.) Both things cannot happen at the same time. This is the Triffin dilemma.

By agreeing to have its currency used as a reserve currency, a country pins its hands behind its back. In order to keep the global economy chugging along, it may have to inject large amounts of currency into circulation, driving up inflation at home. The more popular the reserve currency is relative to other currencies, the higher its exchange rate and the less competitive domestic exporting industries become. This causes a trade deficit for the currency-issuing country, but makes the world happy. If the reserve currency instead decides to focus on domestic monetary policy by not issuing more currency then the world is unhappy.

In his book, Gold and the Dollar Crisis: The Future of Convertibility, Triffin pointed out that pumping dollars into the world economy through post-war programs, such as the Marshall Plan, was making it increasingly difficult to stick to the gold standard. To maintain the standard the U.S. would have to both instill international confidence by having a current account surplus while also having a current account deficit by providing immediate access to gold. In reality, issuing a reserve currency means that monetary policy is no longer a domestic-only issue—it is international. Thus, the reserve currency status is a threat to national sovereignty.

A second article focuses on the geopolitics of the reserve currency, putting a positive spin on globalization and claiming that the aim of the Bretton Woods conference was to avoid a depression after the war by discouraging anti-trade policies. Tellingly, it also states that Bretton Woods put the United States (oligarchs) in control of international, free-world trade. Historical analyses often get the effects of these policies wrong maybe because Bretton Woods actually worked for the American population for a while. It only stopped working when the rest of the world began to recover from the war. That’s when U.S. began to run persistent trade deficits. This can be explained by the fact that for the global financial system to operate, the United States must act as the importer of last resort to ensure ample global liquidity, no matter the cost to the U.S. population.

Bretton Woods worked for the rest of the world better than for the American people. Then in the late 1960s European nations became concerned about their huge reserve balances and began to convert their dollar balances into gold. The gold standard was ended out of necessity on August 15, 1971. Since then the world has operated with a non-fixed currency system in which many governments actively intervene to manipulate their own currency exchange rates to help themselves. For obvious reasons, none of them are stepping up to be the next reserve currency. (Oil is apparently not the same thing as a standard of value, however the petrodollar did assure the continuation of the dollar as the reserve currency. I would appreciate it if someone could enlighten us on the difference between the gold dollar and the petrodollar.)

Today China is the largest economy in the world and the U.S. is the second largest. China’s economic development would not have been possible without the United States’ willingness to purchase Chinese exports. Until the early 1980s the U.S. economy was large enough to absorb the world’s imports without significant account deficits, but the deficits began to rise during the Volcker Fed era which saw the rise of the dollar and the shrinking of the relative size of the U.S. economy. Currently not even the sale of shale oil can achieve a trade surplus.

The same article provides a description of the trade-off between efficiency and equality. It claims that policies promoting equality (including regulation) do so at the cost of efficiency and inflation. Carter and Reagan deregulated the economy to increase efficiency but they naturally caused inequality to rise. This was supposed to help the U.S. in its reserve currency role, but it actually made it difficult for the U.S. to act as the importer of last resort. No one could afford to buy all of those imports. The policy makers’ response was to raise household debt. Household debt increased more quickly in the 1980s due to both the deregulation of financial services and rising income inequality. Although the shrinking economy called for weaker consumption, the reserve currency required rising consumption. (Remember how the people’s spendthrift habits were supposed to have brought about the Great Recession? Not true—the Recession was the result of the reserve status of the dollar.)

Unfortunately for the entire world, U.S. households have now been ‘deleveraged’ and global trade growth has stalled. Now what do we do? There are six possible solutions:

First: Replace the reserve currency nation with nations from an international body such as the G-20 or the IMF. Unfortunately this will require a high degree of coordination, which is unlikely, and it will not provide all of the public goods now offered by the United States.

Second: Another nation (or currency) could take over the role. This looks unlikely as well. Take for example the euro. One problem with this is that the Eurozone does not issue its own debt. Individual nations issue debt denominated in the European currency. So there really isn’t a Eurozone-wide, risk-free instrument issued by the Eurozone itself. Even if this problem could be solved it is not likely that the Eurozone would be willing to sacrifice industries for the reserve currency status. It would be a historic change in German economic policy to accept persistent trade deficits. Germany won’t even take steps to boost imports within the Eurozone to help the periphery nations within the single currency. (Remember the comparison of German social spending with U.S. social spending? Now you know the rest of the story.)

Third: The IMF could take on the role of a global central bank. Need I say more about this option? Even if we could trust the IMF, this would require all nations to give up control of their own money. Since a nation’s currency is a key element of sovereignty this is not likely.

Fourth: The world could opt for a return to the gold standard or a similar type of crypto-currency. The criticism of this possibility is very interesting.

However, historical evidence suggests that support for the gold standard is strongest when suffrage is restricted to creditors. When the vote is expanded, the ability of governments to remain in a restricted currency system is lessened.

The source cited for this claim is: Who Adjusts? Domestic Sources of Foreign Economic Policy during the Interwar Years by B. Simmons.

Fifth: The nations of the world can simply abandon globalization and opt for regional constructs. There would be trade within these blocs but little trade outside of them. Global trade would be settled in gold or other commodities between blocs. This outcome would likely lead to the steady erosion of globalization.

Sixth: The U.S. could remain the reserve currency but curtail the role it plays. In other words, it could selectively apply trade barriers against nations it feels are taking advantage of America’s openness to trade and make export promotion a less attractive model of development. This outcome would be quite detrimental to emerging economies and it would steadily undermine globalization. It would eventually devolve into option #5.

In conclusion, the reserve currency and globalization go together. Geopoliticians consider globalization a good, and therefore, the possibility of a political movement to undermine the dollar’s currency role is a threat. I beg to differ. Our problems are due to the fact that the dollar was taken captive. It must be reclaimed as the sovereign currency of the United States. It follows that globalization doesn’t work. It must end.